Burial insurance? It's your funeral

BOSTON (CBS.MW) -- People who buy insurance are betting that they are going to die. It's a safe bet that someday they will be right.

But making that bet on a policy designed to cover burial expenses is almost always a bad decision.

Physicians Life Insurance Co. advertises its "burial expense plan" on national television, touting it as an "important step toward protecting your family."

Unfortunately, the company's coverage - and other policies like it - are a miserable step in protecting your money and that's why the Physicians Life Burial Expense Plan is today's pick for Stupid Investment of the Week.

Stupid Investment of the Week is designed to highlight the character flaws and design problems that make an investment less than ideal for the average consumer. By highlighting the trouble spots in one investment, the hope is that consumers will be better armed to sort out the key issues in other products they hold or are considering.

While obviously not a purchase recommendation, neither is Stupid Investment of the Week an automatic sell signal, as there may be times when unloading an problem selection only compounds the problem.

In the case of the Physicians Life burial policy, however, anyone not on life support is likely to be able to find a better option by simply shopping around.

It is important to recognize that burial insurance policies, in general, are different from pre-planning and pre-paying for a funeral. Some of these insurance policies are designed to strictly pay funeral costs, others provide a set amount of cash to the family.

According to the National Funeral Directors Association, the average funeral costs more than $5,150, and that does not include cemetery costs.

Physicians Life's burial plan offers up to $10,000 in permanent whole-life insurance protection (you can also get policies for $2,000 or $5,000). It's "the thoughtful way to deal with the inevitable emergency."

You can boil the firm's sales literature down into one key selling point, namely full coverage from the first day.

This is a big deal because many burial insurance policies have a two-year window during which the purchaser's death results only in a return of premiums paid. In the case of Physicians Life, suicide within the first two years is the only exception to immediate coverage.

Physicians has other selling points, of course, but they're bunk.

Consider the money-back guarantee, which promises a refund if you give up the policy for any reason within 31 days of receiving it. According to the offer the company sent me, the first month's premium is $1. They don't start extracting the serious bucks until you're locked in.

Likewise, promises of building cash value or of a policy that remains in place until you hit age 100 are hollow when you consider the small benefits amount. And while the policy promises coverage without a medical exam, it is not guaranteed so you can be rejected based on information in your medical files.

The Physicians Life executive whose auto-pen signed a letter to me did not return my calls this week to discuss the policy.

With benefits at such a low level, Physicians' burial expense plan is obviously targeted at lower-income consumers, folks concerned that the cost of a funeral could wipe them out. In general, burial-expense coverage is designed to supplement life insurance.

But if someone fears being unable to afford a funeral, they probably can't afford Physicians' plan.

Assuming that this coverage would appeal most to an older consumer, consider the likely experience of a 70-year-old female non-smoker.

To get $10,000 in Physicians' coverage, she would be looking at a $74.50 monthly premium, or nearly $900 per year. If she lives to be 81 and keeps the policy in force, she will have paid nearly $10,000 in premiums to get a $10,000 benefit; had she put the money in a savings account earning 2 percent per year, she'd have nearly $11,000 in the bank, and her ultimate payout would grow for as long as she funds the account.

At age 70, that woman could buy a 10-year level-term policy through Reliastar for just over $1,000 per year. That's about $100 more in annual costs for $90,000 more protection.

The comparisons get worse. If the woman currently has $10,000, she could make a capital transfer into a $100,000 no-load, no-commission life insurance contract. At that point, there would be no surrender charges and she would have the immediate cash value of her investment. If she wanted to protect herself up to the age of 90, after transferring the money, she could get an ING Southland Life policy for $600 a year.

Long-time insurance consultant Ben Lipson of Chestnut Hill, Mass. notes that burial coverage is a bad wager on a quick death, where the best you can hope for is that you die soon, having paid just a few thousand dollars in premiums while collecting $10,000 in benefits. (The odds on this bet get worse when coverage doesn't begin immediately.)

"You get better odds in a casino, so if you want to gamble your money, don't do it with one of these policies," says Lipson.

Consumers who worry about burial costs can protect themselves. They can create a special savings account, making it "payable on death" to the funeral home or to whoever will be responsible for managing funeral costs. Moreover, they can shop around and do some pre-planning, managing the costs, targeting a specific savings amount and forgetting about insurance.

The final offense in burial expense coverage is the way it is sold.

While Physicians Life pushes its product on television, many people are approached about the burial policies after the death of a loved one. Think words like "inevitable emergency" and cringe.

David Bohannon, president of Consultants Corner, an insurance brokerage in Louisville, Ky. notes that his mother nearly bit on a sales pitch for a burial policy eight years ago, after the death of her husband. His mom, now 78, had to be convinced she would be better off saving the cash instead of buying a policy.

Says Bohannon: "Unless you think you're checking out tomorrow, any smart consumer should look at this and realize there must be a better way to pay for your own funeral."

Editor's note: Do you have a nominee for Stupid Investment of the Week? Contact Chuck Jaffe by e-mail.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.